I can understand why libertarians might favour a flat tax on superannuation contributions and on ordinary income. I disagree vehemently with that position, but it’s logically coherent to me. Personally, I favour a progressive tax on both of those things, and I think that position also makes sense. What isn’t coherent to me is the idea that we should tax ordinary income in a progressive way, with higher income earners paying a greater proportion of their income in tax, but we should tax super contributions with a flat tax. How does that make sense?
Yet the proposition that higher income earners should pay more tax on their super contributions seems to be accepted wisdom, at least in certain quarters. Wayne Swan was accused of ‘class warfare‘ when he announced that we’d move from having a completely flat structure of tax on super contributions to one that’s flat between $37000 and $300000, and then has an increased rate at the very top.
Before July last year, the way we taxed super contributions didn’t make much sense at all. The lowest paid workers were paying 15% on their super contributions, even though they didn’t pay any income tax on their ordinary earnings. Not only were they not getting a tax concession on their super contributions, they were effectively being penalised. A low-paid full time worker wasn’t penalised, but they weren’t benefiting either, with super and ordinary income taxed at the same rate. To fix up this glaring inequity, the government introduced a new ‘offset’ that effectively cancelled the tax that people on less than $37 000 paid on their super contributions. So far, so good.
A typical full-time worker faces a marginal tax rate of 32.5%, but pays 15% on super contributions. That’s a tax concession of 17.5%. If you’re a higher income earner, you get a bigger concession – if you’re on the 37% tax rate, your concession is 22%, while those on over $80 000 get a 30% concession. Where Wayne Swan went too far in the eyes of some was to scale this back, just a little bit, so that people on over $300 000 now pay 30% on their super contributions, for a tax concession of 15% – pretty close to the 17.5% that ordinary workers receive. If you’re in the $180 000-$300 000 bracket, you still get the 30% concession.
Tax rates
Tax concession (marginal rate minus the rate on super contributions) – percentage points
The 2012 changes were a step in the right direction, but we still have only a very mildly progressive system of tax on super contributions. I’d like the country to move towards a system in which everyone received the same ‘concession’ for super contributions. Let’s say the concession is 17.5 percentage points. That means, if you earn between $37 000 and $80 000, nothing changes – you still face a 32.5% marginal tax rate on your income, and 15% on super. If you’re in the next bracket, you’ll pay 19.5% instead of 15% on your super; high income earners would pay 27.5%.
Tax rates on super contributions with an equal concession
With a change like that, everyone still gets a concession on their super, but they’re not skewed to high income earners as they (still) are now. This isn’t a radical proposal – it’s pretty much what’s in the Henry Review, although the Review proposed a flatter personal tax structure and an equal 20 percentage point concession for everyone who earns above $25 000. Now, can someone explain to me why a system like this would be a bad idea? Preferably without using the phrase ‘class warfare’.
Note: I’ve ignored the Medicare Levy in my charts, for simplicity’s sake. I
As I’ve said before, until we can invent some kind of electronic brain, a flat tax is significantly easier to calculate.
Ha!
Hi Matt, why give any superannuation concessions to the rich at all?
Hi John,
I support taxing super in a concessional way. I just think those concessions shouldn’t be as skewed as they are at present. Some of the changes Costello made in the mid-2000s I think also went too far.
Because superannuation is a form of investment that grows the economy over the long-term. The more money the government takes away from the national savings pool, the less money invested by the private sector. You are looking at this purely from an equality angle without regard for the economic consequences.
I also support a flat tax on all income, yes I am a libertarian and thank you for pointing out our “logically coherent” position.
The fact that super is a source of funds for productive investment is an argument for taxing super at a concessional rate. It’s not an argument for giving a greater concession to high income earners.
Actually, I doubt super actually increases investment and personally I’d be happy to scrap the entire scheme.
http://www.macrobusiness.com.au/2013/01/the-pre-saving-myth-of-superannuation/
Not me
Matt, if you’re a Social Democrat, you’d have to conclude that the whole thing was and remains a disgrace. We’ve now got around a trillion and a half dollars under flat taxation – all thanks to the ALP, and the unions of course. That’s quite some handiwork. But Paul Keating and Bill Kelty are heroes right?
Hi Nicholas,
I am a fan of Keating and Kelty, but I’m not going to defend the way we tax super (as the post, I hope, made clear).
Alternatively, give a discount of whatever the lowest marginal rate is (19% at the moment I believe).
Hi Bill,
Yep, that would also be an option. I chose 17.5% in this example just so that those on the ‘middle income’ MTR (32.5%) would still be taxed at 15% on super contributions. Increasing the concession for those people would be very costly (as there’s so many of them), but I suppose that could be funded via the reduced concession for higher income earners.
I wrote about this in the Canberra Times recently. http://www.canberratimes.com.au/opinion/super-tax-breaks-yield-more-to-the-already-rich-20130211-2e8qr.html
Hi John,
Yes, I saw that. I note that your piece is mostly about reducing the extent to which concessions are skewed towards high-income earners, rather than ending concessional treatment all together.
Well, the first step to abolishing the concessions is understanding, and pointing out the facts of the benefits going mainly to the rich is important in doing that.
Treasury’s Distributional analysis of superannaution taxation concessions is good in helping understand the upside down nature of the concessions. See http://www.treasury.gov.au/Policy-Topics/SuperannuationAndRetirement/Superannuation-Roundtable/Distributional-analysis-of-superannuation-taxation-concessions.
Treasury’s analysis in the paper is that the top ten percent of income taxpayers in 2009/10 received over 38% of the superannuation tax concessions. The bottom ten percent received minus 1.2% of the benefits, ie were penalised for investing in superannuation. The second decile of income taxpayers (those earning between $14,000 and $21,000) received 0.9% of the concessions. Compare that to the top one percent, those earning greater than $241,000 taxable income, who received 9% of the concessions.
In other words people earning $241,000 or more in taxable income received ten times as much of the superannaution concessions as those earning less than $21,000.
Some tinkering since then will see, on Treasury estimates, the top decile still receive more than 31% of the value of the concessions in 2012-13. If that figure holds for 2014/2015, then based on Treasury predictions of revenue forgone of $45 billion because of the concessions, almost $15 billion will be going to the top 10% of income earners. Sounds fair doesn’t it? [Sarcasm alert]. The top five percent will receive over 20% of the value of the concessions or $9 billion while the top one percent, on taxable incomes of $295,000 or more, will receive over 5% of the value of the concessions or $2.4 billion. The bottom ten percent will go backwards by 0.2% and the second decile (with taxable income between $15,000 and $24,000) will receive just 1.6% of the concessions or $670 million.
The superannaution taxation concessions system is highly inequitable. The richer you are the greater the tax grants you get. It’s time to stop these welfare handouts to the rich. The best way to do that is to abolish all the concessions and use the increased revenue to fund an increase in the pension to $30,000. If that is a bridge too far then set income and assets tests equivalent the pension for access to the superannuation concessions.
Why should people get massive tax subsidies to stop them going on a pension they would never be within cooee of because of their wealth?
Others have suggested that superannuation should not be taxed during the accumulation stage, but taxed at full marginal rates for however much is taken out in a given year during drawdown phase (less return of capital on which tax has already been paid).
That not only simplifies (and therefore makes cheaper) the administration of the accumulation phase, but is also very progressive, inasmuch as it also ends up as a defacto inheritance tax when the superannuant dies.
It also means that there is not a third set of taxes with different rules for superannuation (ie all those 15%s and $174k offsets etc etc).
Nobody has ever really explained why this is a bad idea, but it gets the brush off nonetheless.
Mark, this is the E-E-T model. Exempt on contribution; exempt on earnings but fully taxable on withdrawal at marginal tax rates. In Australia we used to have a t-t-t system but now have t-t-E. I thought E-E-T had a lot of academic and other support. Obviously it doesn’t have the support of politicians.
It’s not a bad idea, it makes total sense… unless you’re in the business of government and you want revenue now now now. If all that money was exempt, you’d be waiting up to 50 years to start spending it! How on earth would you fund election promises?
Related lines of reasoning provide us with the (hundreds of?) billions in unfunded public service super liabilities.
[...] grounds for reducing the tax expenditures on super both in order to increase revenue and to reduce the unfairness of the [...]